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Chapter14_xlsSol

# Chapter14_xlsSol - Problems Problem 14-4 Problem 14-7...

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Problems Problem 14-4 Problem 14-7 Problem 14-15

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Problem 14-4 a. Total Debt 5,000.00 Interest rate 10.00% ABC XYZ Debt Equity Debt Equity FCF Payments Dividends Payments Dividends 800.00 0 800 500 300 1,000.00 0 1000 500 500 b. equity in ABC would 10.00% provide cash flows of 80.00 or 100.00 per year These cash flows could be replicated by owning 10.00% of the debt and 10.00% of the equity of XYZ. The debt cash flows would be 50.00 per year 50.00 in either case. The equity cash flows would be 30.00 or 50.00 per year For total cash flows of 80.00 or 100.00 per year, as you would get from buying ABC equity. c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 10%, what is an alternative strategy that would provide the same cash flows? equity in XYZ would 10.00% provide cash flows of 30.00 or 50.00 per year These cash flows could be replicated by borrowing 500.00 and buying 10.00% of the equity of ABC. You would receive dividends of 80.00 or 100.00 and pay interest of (50.00) per year (50.00) in either case. for a total cash flow of 30.00 or 50.00 per year, as you would get from buying XYZ equity.
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